Wentz Weekly Insights
Fed Gives Less Hawkish Tone While Mixed Economic Data Complicates Path Ahead

We follow up the newsletter from two weeks ago when it was titled “Economic Data Deteriorates to Close Out 2022” with new economic data last week that was very solid, reflecting a labor market that is much stronger than originally thought. The Department of Labor’s employment report on Friday showed just over half a million jobs were added in January, well above the expectations of around 180k, with job gains spread throughout all industries. In addition, the prior two months saw upward revisions of another 71k jobs. Since losing 22 million jobs in the early months of the pandemic, the labor market has now gained nearly 25 million jobs since and has averaged just over 400k new jobs per month over the past 12 months.
Another piece of good news is the household survey showed nearly one million people entered the labor force, welcoming news as earlier in the week the JOLTS (job openings and labor turnover survey) showed the number of job openings increased back near record highs of 11 million, up substantially from 10.3 million in December. That means there are still nearly two open jobs for every unemployed person. The combined data caused the unemployment rate to fall to 3.4% for the lowest since 1969.
In addition, wages rose at a 0.3% pace in the month, and are 4.4% higher than a year earlier, both meeting expectations, but still higher than the historical trend. Larger wage gains were seen in the lower earnings sectors like leisure and hospitality and education/health services, both of which are service related. The Fed’s thinking is if the labor market remains tight and wages continue to grow, inflationary pressures will remain in the system, particularly in the services sectors (as opposed to goods). Another strong data point was the average work week increased to 34.7 hours from 34.4 hours – doing simple math, the additional work hours would equate to another 1.2 million jobs.
This strong report follows recent data that showed a significant slowdown in consumer spending, manufacturing activity that has contracted for months, and house sales that are at the lowest levels in a decade. This makes the uncertain environment even harder to evaluate and muddies the picture for the Federal Reserve and investors.
In its continued effort to fight off inflation, the Federal Reserve’s policymaking committee, the FOMC, raised rates by 25 basis points as expected, slowing from the 50 bps pace in the December meeting, moving the upper bound of the target range to 4.75%. The statement on the policy decision was little changed from December, but when determining future rate increases the Fed talked about the “extent” rather than the “pace” of future increases, reflecting it is no longer about how fast rates rise, but rather how high they ultimately go.
The key part of the day was Chairman Powell’s Q&A segment of his press conference which included remarks for both sides of the argument. The biggest takeaway was Powel acknowledging the disinflationary progress has now gotten under way. He added the labor market data remains strong, supporting his base case that a “soft landing” is likely. One of the reasons for the market rally to start the year is it has increasingly priced in the scenario of a soft landing – one in which the economy avoids a recession while inflation moves back to 2%. One key question was if the recent easing of financial conditions (lower market rates, higher asset prices like the equity market, etc) changes the Fed’s direction or pace in which Powell downplayed that and instead focused on the tightening that has been made since last year and not to focus on short term moves, but the “sustained changes to broader financial conditions.”
The other key question was on the disconnect between the Fed’s projections that rates will move above 5% and stay there and the market’s expectation that rates will be cut in the second half and further in 2024. The Fed continues to project rates at 5.13% by the end of the year while markets are pricing that rates end the year at 4.53%. Powell suggested he is not worried about the divergence and talked about the different perspectives and how he is “not going to persuade people to have a different forecast.” It appeared Powell was not bothered about the market performance, unlike past instances.
As lead portfolio strategist from Natixis Asset Management puts it, “the market isn’t fighting the Fed because the Fed is no longer fighting the market.”
As such, markets should become less worried about the Fed and what they do with interest rates and will begin to focus more on the earnings picture. Last week was the busiest for the earnings season with about 30% of S&P 500 companies reporting, including some of the largest like Apple, Amazon, Facebook, and Google (see a brief recap in company news below). A big takeaway was the large impact from the stronger dollar (stronger dollar reduces profits made overseas), lower sales including advertising as businesses are more cautious in the uncertainty macro environment, continued supply constraints, and higher costs, among others. The earnings growth rate for the quarter stands at -5.3%, after starting the earnings season at -3.2% (which was already a pretty low bar set by company’s guidance, preannouncements, and analysts’ estimates).
One key theme though for the companies that have already reported is the vast amount of uncertainty in the macro environment. This is causing companies to forgo guidance or provide guidance in wider ranges, making stock valuations more difficult. While we have seen a significant rally to start the year, it has been driven by the premature and increasing confidence in a soft landing, oversold conditions, and to a larger degree, short covering. Until the macro picture becomes clearer, market volatility is expected to continue.
Week in Review:
U.S. equity markets got off to a slow start to last week ahead of a busy week of economic data, Fed talk, and earnings reports. It didn’t help a WSJ article dropped in the morning from Nick Timiraos that said Fed officials are worried inflation could reaccelerate due to the tight labor markets. Stocks and bond prices both fell with all sectors (beside consumer staple’s 0.07% increase) declining on the day as the S&P 500 fell 1.30%.
Stocks finished the month of January on Tuesday the same way it started the month with a move higher, basically offsetting all of Monday’s losses. An upgrade to global growth forecast by the IMF and data on slower wage growth in the fourth quarter may have been catalysts (which gives more confidence inflation will come down), but the index for wage growth was still elevated. Earnings included GM crushing estimates with a solid forecast, UPS with mixed results on lower volume, Pfizer disappointing on lower Covid vaccine revenue, and McDonald’s with solid growth in its stores but margins that caused concern due to higher costs. All 11 sectors finished higher with the S&P 500 ending up closing 1.46% higher for the session. It was the best January since 2018 for stocks with the S&P 500 gaining 6.18% and the NASADQ gaining 10.68%, its best since 2001.
A disappointing earnings from Snapchat, which now forecasts, initially unexpected to investors, a revenue decline this quarter, sent many advertising stocks lower, while AMD reported much better than expected results with an optimistic view of the second half of 2023. Stocks were slightly lower to start the day on Wednesday, but the Fed decision of raising rates 25 basis points and Powell’s acknowledgement that the disinflationary process has started sparked a rally across the board, with the biggest beneficiary growth stocks. Bond yields moved lower over the expectation rates are nearing the end of the hike cycle and rate cuts may be in the picture, despite Powell indicating there is still work to do. Data in the morning included manufacturing activity that continues to contract in January and a job market that remains extremely tight with job openings rising back near record levels. Despite the mixed signals, stocks rose 1.05% on what the markets took as dovish takeaways from the Fed.
Stocks followed through on Wednesday’s rally in Thursday’s session, with growth continuing to outperform, however, the recent move may be due to short covering in some of the most heavily shorted stocks. Internals were not as strong as the index gains would have suggested. Data in the morning showed labor costs cool more than expected but jobless claims that fell as well, another indicator of the tight labor market. Facebook’s earnings, with it cutting costs more than expected, helped push stocks higher, particularly growth as the NASDAQ’s 3.25% gain outperformed the 1.47% gain on the S&P 500.
Several of the biggest companies reported Thursday after the bell including Apple, Alphabet (Google parent), and Amazon, all of which missed expectations and provided no guidance or guidance that was weaker than estimates. Friday morning we saw the employment report show a very strong 517,000 job gains in January, well above estimates, with wages continuing to grow at a strong pace. This led the markets lower on a good news is bad news event as that supports the Fed’s view that more work needs done to control inflation. Stocks tried to rally off the morning lows, but ended up closing 1.04% lower.
Bonds rallied mid-week, with yields falling to their lowest levels in months on Thursday (the 10-year Treasury reached 3.33%), driven by the dovish tone in the Fed meeting but yields moved higher to close the week after a strong jobs report with the 10-year finishing at 3.53%. Oil saw a 7.9% move downward over reports Russia was maintaining oil production and the concern about a further global economic slowdown. For stocks, growth ultimately outperformed value again with the major indices finishing as follows: Russell 2000 +3.88%, NASDAQ +3.31%, S&P 500 +1.62%, Dow -0.15%.

Recent Economic Data

  • The Case Shiller Home Price index declined again in November, registering a 0.6% decline in home prices in the month for the fifth consecutive monthly decline, following a 0.5% decline in October. Over the 12 month period ended November, home prices rose 9.2%, still a strong pace of gains, but slowing for the eighth consecutive month after having seen a record high 20.6% annual increase in March 2022. Since the start of Covid February 2020, average home prices are up 39% (but down from being up 45% in March). All 20 cities in the report showed price declines in November, the largest coming from Phoenix with a 1.9% monthly decline. Over the past 12 months, Miami (+18.4%) and Tampa (+16.9%) continue to be at the top with the largest increases, with San Francisco (-1.6%) and Seattle (+1.5%) still at the bottom. Cleveland home prices over last 12 months were up 7.5%.
  • Consumer confidence, measured by the Conference Board’s monthly survey, declined in January to 107.1, down from 109.0 in the prior month, despite an increase in the consumer sentiment survey. The decline was due to weakness in the expectations index, which fell to 77.8 from 83.4 in the prior month (an index reading below 80 often signals a recession in the next year). Consumers were less upbeat about the outlook for jobs and buying plans (on bigger ticket items), while inflation expectations ticked up to 6.8% from 6.6%. Confidence fell most for low income and younger households. The current conditions index was better, rising to 150.9 from 147.4 thanks to equity market gains in January.
  • The ISM manufacturing index was 47.4 in January versus the 48.0 estimate for the weakest level of general activity in the manufacturing sector since May 2020 and the third consecutive month of contraction. Prices paid index continues to improve at 34.5 from 39.4 last month (below 50 suggests easing prices), employment was 50.6, still showing improvements but slowing from 50.8 last month, while the important new orders index was 42.5, a very low level indicating a steep contraction in orders, down from 45.1 last month, the lightest since depths of Covid and the fifth consecutive contraction for new orders. The worry about the future caused manufacturers to cut production further in January.
  • Construction spending was down 0.4% in December, the weakest since August, and compared to the expectation of no change. The decline was driven by a 0.5% decline in nonresidential spending as well as a 0.3% decline in residential spending. Compared to a year earlier, construction spending was up 7.7%, mostly due to nonresidential spend which was up 13.8%, whereas residential spend was up just 1.6% as home building activity continues to cool.
  • The number of vehicles sold in January was at an annual rate of 15.7 million, this is a 18% increase from December and 4% increase from January 2022. A sizeable chunk of the increase was due to fleet sales to corporate purchases, like car rental companies.
  • U.S. worker productivity, which is known to be one of the longer-term driver of economic growth, increased 3.0% in the fourth quarter (on an annualized rate), much better than the 2.4% expected. The 3.0% increase came as output increased 3.5% and hours worked increased 0.5%. For the year 2022, annual productivity decreased 1.3% compared to 2021, the weakest productivity change since 1974. Unit labor costs were a little lower than expected, rising at a 1.1% annual rate reflecting a 4.1% increase in hourly compensation and a 3.0% increase in productivity.
  • Compensation costs for workers increased 1.0% in the fourth quarter 2022 (+4.0% on an annualized pace), slightly below the 1.1% increase expected. Compensation costs were 5.1% higher than the fourth quarter 12 months prior, rising from the 5.0% y/y increase seen in the third quarter. Wages and salaries increased 1.0% in the quarter while benefit costs increased 0.8%, and were 5.1% higher over the past 12 months. Higher compensation costs were spread throughout all industries with no industry seeing a decline in the quarter. It is welcoming seeing this come down, as Powell has specifically called out this report, but still too high.
  • ADP said private employers added 106,000 jobs in January, a little below the expectations of 160,000, as the report says job growth was hit by extreme weather in the week the data was taken (California floods, back-to-back ice and snow storms in central and eastern U.S.). Job growth across employer size was mixed, small businesses seeing the largest decline, while mid and large sized businesses saw increases in employment.
  • On the last business day of the 2022, there were 11.012 million job openings, much more than the 10.3 million expected and the highest since July 2022 (11.855 mil was highest ever in March 2022), and rising from the previous four-month average of 10.5 million. The number of separations was little changed, with the quits at 4.1 million, a rate of 2.7%, which were both relatively unchanged, remaining at high levels indicating the ability and confidence for employees to change jobs for a better or higher paying job.
  • The number of unemployment claims for the week ended January 28 was 183,000, falling another 3,000 from the prior week, and the lowest since April 2022. The four-week average moved lower to 191,750. The number of continuing claims was 1.655 million, down slightly from the prior week with the four-week average at 1.651 million.
  • There was a massive beat on the employment report for January. The Department of Labor said its establishment survey showed there were 517,000 job gains in January, above the estimates of 185,000, in addition to the prior two months being revised up another 71,000 jobs (+290k in November, +260k in December). Job gains were widespread again, most gains seen in leisure and hospitality, professional services, government, health care, retail, construction, with smaller gains in transportation/warehousing, social, and manufacturing, and the other sectors saw little change. Another piece of goods news is the household survey showed the labor force expanded with almost 1 million people entering the workforce which caused the labor force participation rate to increase to 62.4%. The number of people employed saw a large increase as well, rising 894k to 160.138 million and that combined with the number of people unemployed dropping slightly caused the unemployment rate to fall to 3.4%, the lowest since 1969. The underemployment rate (the U-6) increased slightly to 6.6% from 6.5%. Back to the establishment survey, the average work week saw a pretty large increase, to 34.7 hours, up from 34.4 hours (that is an unusually large move). If you add that to the number of people employed that’s another 48 million hours of work in a week, equating to more than one million additional jobs. Probably the most important data point in the report is wages increased 0.3%, as expected, but December’s wage gains were revised up to 0.4% from 0.3%. Compared to a year ago, wages are up 4.4%, meeting expectations and cooling from 4.9% in December (revised up from 4.6%).
  • Mortgage rates fell again last week with the prime 30 year rate at 6.09%, down 33 bps since the start of the year and down from the high of 7.08% in November. Some reports say the 1% decline over the past three months indicates an additional 3 million people would be able to qualify for a median priced home.
  • The ISM services index, which measures activity in the services sector, was at 55.2 for January, solidly beating expectations of 50.6. The important new orders index was 60.4, up significantly from 45.2, while general activity was 60.4, also up significantly and both representing the strongest activity since January 2022. Employment was at breakeven at 50.0, while prices paid fell to 67.8, still a very high level, but slowly falling from its early 2022 peak. The report suggests the service sector is still firing on all cylinders, and December may have been an outlier. This is an issue on the inflation front, since most inflationary pressures now are coming from core services versus goods.

Company News

  • Ford said it would cut the prices of its line of electric Mustang Mach-E, ranging from $600 to $5,900 depending on the model. This comes days after Tesla cut prices globally on its EVs by as much as 20%, creating what could turn into a price war between EV producers. At the same time, Ford said it would increase the production of the Mach-E, now targeting 2023 production of 270k vehicles, up from the projected 130k in 2022. GM has said it had no plans to adjust prices in response.
  • Nike has filed a lawsuit against Lululemon based on its accusation that several of Lululemon’s footwear products infringe on its patents. The patents deal with textile and how the footwear perform when force is applied.
  • It has been a very mixed week of earnings reports. Here are some highlights:
  • Snapchat parent company Snap missed expectations due to weakness in the U.S. with slowing active user growth. Expects headwinds seen at the end of 2022 to continue at least through the current quarter, and expects a decline in revenue in the current quarter as advertising demand has yet to improve.
  • Advanced Micro Devices (AMD) beat expectation with strong results in its embedded and data center segments, offset by continued weakness in PCs and gaming. Expects PC weakness to bottom in Q1 and demand to pick up through the year with inventories being worked through and improving after the summer months.
  • General Motors significantly beat expectations while saying it is accelerating production of its EVs, including the launch of several new EVs (Silverado, Blazer, Equinox) and is on track to produce 400k EVs in 2022 through the first half of 2024, much higher than the street’s expectation.
  • McDonald’s beat expectations as consumers were more cognizant of their spending, with results helped by menu price increases and increase in guests visits which it contributed to its successful menu and marketing campaigns. However, the stock was lower over concerns on its rising costs and impact of the stronger dollar.
  • Caterpillar reported mixed results with strong cash flows thanks to strong margins, but earnings were lower due to a negative impact from the strong dollar.
  • Facebook parent Meta reported mixed results, seeing a decline in revenue for the first time ever, with forecasts for 2023 in line with expectations as it took significant moves to cut costs and capital expenditures. It was last quarter the stock was punished 25% because of its aggressive spending on the metaverse, now this quarter the company lowered its spending amount and announced a large share buyback program, pleasing investors and sending the stock higher.
  • Apple missed estimates as iPhone sales were short of expectations over weaker China demand and supply constraints from Covid shutdowns at its largest manufacturer. Avoided guidance, but said revenue is expected to be similar to last quarter, helped by improving China demand, but the company remained very cautious on the macro environment.
  • Amazon reported mixed results, its bottom line being impacted from foreign exchange. Its AWS (cloud computing segment) missed already low expectations, and its guidance for Q1 was also below estimates causing the stock to move lower.
  • Google parent Alphabet missed expectations, seeing a decline in ad revenue for the first time, spread between its Google search and YouTube divisions. The pullback in ad spending broadened throughout the quarter due to macro uncertainty. The company talked a lot about its increasing effort to push AI technology into its advertising platform. Concerns over advertising demand led the stock lower.

Other News

  • Congress was informed by Biden that the public health emergency declaration related to Covid will end on May 11. There are many provisions tied to the public health emergency that will now end.
  • After a meeting with President Biden to discuss the debt ceiling issue, House speaker McCarthy said he had a very good discussion and said the markets should feel better based on the meeting he had with Biden.
  • Continuing its crackdown on providing China with advanced chips and chipmaking technology, the White House said it would tighten export controls even more by halting all licenses for U.S. suppliers to export to China’s Huawei, citing national security concerns, cutting off Huawei from American suppliers.
  • Over the upcoming weeks, we expect to see more politicians announce their intention to run for President. Last week Fox News reports Nikki Haley is expected to announce she will seek the Republican nomination for President. She is expected to make the announcement at an event in Charleston, SC on February 15.
  • The International Monetary Fund (IMF) updated its global growth forecast due to what it said was resilient demand, strong labor markets, China’s reopening, and the easing of Europe’s energy crisis. It said it expects global growth to be 2.9% in 2023, up from 2.7% in its estimates from October.
  • Central Bank news:
  • The Bank of England raised its benchmark rate by 50 bps to 4%, for its tenth consecutive increase, with a 7-2 vote. Officials dismissed any expectation that it is ready or nearing the end of rate hikes or a pivot to rate hikes, saying there is still a way to go to curb inflation.
  • The European Central Bank raised its benchmark rate 50 bps to 3% and indicated it expects to raise them another 50 bps at its next meeting in March. It said many of the things the Fed has said – plans to continue to raise rates to a restrictive level and keep them there until it sees inflation moving down and will stay data dependent, except the ECB expects another 50 bps increase at its March meeting. ECB president Christine Lagarde said the central bank will stay the course and inflationary pressures are still “alive and kicking.”
  • The OPEC+ committee recommended to keep oil production unchanged, consistent with the levels set in October as it waits for a more clear outlook as China fully reopens after stringent covid restrictions the end of 2022. Saudi Prince Abdulaziz bin Salman said it will remain cautious when it comes to raising oil production, even though there are tailwinds that could push demand and prices higher. The International Energy Agency has said there are indications China’s growth reacceleration could happen faster than previously expected, leading to higher demand. Separately, Goldman Sachs had a bullish note over the weekend and sees oil rising back to $100/barrel on Russia export pressure and a China demand recovery.

Did You Know…?

Return to the Office
Bloomberg reported more than half the workers in major U.S. cities were back working from an office last week, the first time the rate has been at least 50% since pre-pandemic. The index tracks 10 major metro areas and in the latest week it increased nearly one percent to stand at 50.4%. Out of all the cities tracked, Austin had the highest return to office rate at 68% while San Francisco had the lowest rate at 41%. The data is compiled by security firm Kastle Systems using weekly access-card activity at buildings with Kastle security systems and compares it to a pre-pandemic baseline.
What January’s Performance Tells Us
Based on history, stocks tend to have a positive year when the opening month is strong. When the S&P 500 finishes positive for January, the period from February to December that year is positive as well 78% of the time, with an average gain of 9.1%, compared to an average gain of 6.5% during the same period in all years. The S&P 500 finished January positive by 6.18% (against its historical average of +1.0%).

WFG News

Updates on 2022 Tax Documents
Please note tax documents will not start mailing until January 31. Most retirement accounts will see 1099-R and form 5498 mailed on January 31. Retail accounts will see 1099 and related documents mailed by February 15. Certain accounts with more complex securities may have 1099’s mailed as late as March 15. Please see this email for more details. If there are any questions on tax documents, please reach out to us at 330-650-2700.
Introducing Our Newest Team Member!
We would like to welcome another new member of our team, Ryan Fitzgerald. Ryan has worked in customer service for the past ten years and in the office setting since 2016. She started at Wentz Financial on Halloween Day and has enjoyed getting to work with a new team and the relationships she is beginning to form with clients. Her constant enthusiasm to learn the business has been refreshing for the rest of the team.

The Week Ahead

The week ahead will be much less busy than the prior two weeks, but there are still many earnings reports and data that could move the markets. On the earnings calendar, another 20% of the S&P 500 is expected to report quarterly results with notable results from Activision Blizzard, Tyson Foods on Monday, Chipotle, BP on Tuesday, Disney, CVS, Uber, Under Armour on Wednesday, Expedia, Hilton, AbbVie, PepsiCo, PayPal, and Kellogg on Thursday, and Newell Brands on Friday. The economic calendar is light of data releases. We will see trade data Tuesday morning, jobless claims on Thursday and the consumer sentiment survey for the first half of February on Friday. With the February Fed meeting behind us, we will begin to see public appearances from policymakers with a key event on Tuesday when Chairman Powell will speak at the Economic Club of Washington, in addition to several other district president speeches during the week. On the political side, President Biden will deliver his State of the Union address Tuesday evening (at 9pm EST) to the 118th U.S. Congress.